Playing by the rules is an important element underpinning
the economic system in which we operate. Indeed, it was to avoid a repeat of
lawless behaviour in the increasingly globalised world of the 1930s that
prompted the design of many elements of the current international order (trade
agreements, international supervisory bodies and the safety mechanisms designed
to prevent conflict). But we should not make the mistake of believing that all
rules are good rules.
I was reminded of this when reading an article in The Economist recently which illustrated the case of the US Fourth Amendment bar on
“unreasonable searches and seizures.” The article pointed out how the US Supreme Court has ruled that loopholes in the law make
it admissible to use evidence gathered in one legal case to prosecute another.
As one of the Supreme Court judges who opposed the ruling warned, “Do not be
soothed by the opinion’s technical language. This case allows the police to
stop you on the street, demand your identification, and check it for
outstanding traffic warrants.”
Now you may be wondering what this has to do with economics,
but it is just a fancy way of saying that the law of unintended consequences
can do an awful lot of damage. Think of the operation of the Stability and
Growth Pact in the euro zone. It was originally designed to prevent taxpayers
in Germany from having to bail out their less fiscally rigorous neighbours in
southern Europe. This seemed like a good idea at the time but the adherence to
strict fiscal rules has been one of the factors exacerbating the extent of what
can only be called a depression in places such as Greece. Indeed, the rules are
inherently deflationary and, as Keynes put it, make the process of adjustment
compulsory for the debtor and voluntary for the creditor.
Worse still, although there were explicit rules for the
ratio of public deficits and debt relative to GDP, to which economies were
supposed to adhere, they were observed more in the breach. By 2001, two years
after the euro came into being, Germany had already pushed its deficit through
the 3% of GDP level (as indeed had Greece and Italy) with France following a
year later. Once Germany and France had breached the deficit targets it became
difficult to ensure that other countries could be forced to comply. So not only
were the rules ill-designed, but they quickly became non-credible.
Here in the UK, the question of rules has gained lots of
prominence in recent days in the wake of the EU referendum and various
leadership elections in the main political parties. Prime minister elect
Theresa May has already suggested that she will not seek to overturn the result
of the referendum and will adhere to the rules of the Single Term Parliament
Act and not call an early general election. But if she does eventually trigger
the Article 50 process, in accordance with the perceived wishes of the people,
she will be unleashing a wave of consequences we cannot yet begin to predict.
In economics, just as in law, it pays to be certain of the long-term
consequences before simply following a
predefined set of rules.
No comments:
Post a Comment